Financial Decision Making Essay Example | Topics and Well Written Essays - 1500 words - 1

Financial Decision Making - Essay Example From this, financial ratios could be compared with competitors and be able to understand its strength and weaknesses. Using the financial statements of Abel Athletics, the interpretations of ratios are arrived at and described after each table. 3. Net profit margin. NPM measures how much out in every dollar of sales in a company is kept for earnings. A higher profit margin shows the company is profitable and is in better control of its costs as compared to its competitors.(Answers.com) Again here, Abel keeps 26.4% of its sales for earnings, again higher ratio than the industry. 4. Gross profit margin. The table shows that after deducting the goods sold, Abel has enough funds to support other expenses, such as 58.2% is left for operating costs and profit. Abel also has higher GPM than the industry index. * In terms of profitability based on ROA, ROE, NPM and GPM, Abel Athletics show better performance than the industry index. It is a good indication of growing company for the first year of operation. 1. Quick ratio: This is a measure to find out how Abel will be able to pay its maturing obligations without necessarily selling inventory and a higher ratio is considered better. If this ratio declines over time, or it falls below the benchmark index of the industry, this means the company may be investing too much capital on inventory, or it has taken up too much short term debt. (Investorwords) Abel shows a low quick ratio which is below 1, but still way above benchmark index. 2. Current ratio. This is also similar to quick ratio which consider current assets divided by current liabilities. A ratio of above 1 shows strength, and in this case Abel has more assets to cover obligations and is more liquid than the industry. 3. Net working capital ratio is a measure to find out if company is being able to pay off its short term liabilities. Abel shows a positive working capital which is much higher than the industry bench